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China’s Yuan Devaluation: What You Need To Know

China's Yuan Devaluation: What You Need To Know by Brad McMillan, Commonwealth Financial Network

Some mornings I wake up and wonder what I should blog about. Not today. Looking at my phone in bed to scan the headlines, I couldn’t believe the news—China had devalued its currency! This is a big deal in the financial world.

Why did China make this move?

The Chinese government is very smart and very rational. By devaluing its currency, in this precise way, it intends to achieve some specific goals.

Goal #1: Make the yuan more market oriented. This is the goal China wants to talk about. With the yuan’s trading price now based on the previous day’s exchange rate, the new valuation is arguably more responsive to market conditions and conforms more closely to general practice, possibly increasing the yuan's chances of inclusion in the International Monetary Fund's currency basket come October. China very much wants the power that would come with the yuan achieving reserve currency status, not to mention the credibility the IMF’s endorsement would provide. That said, it’s looking like that will not happen this year.

Goal #2: Give exports a boost. The goal China isn’t talking about is that a cheaper currency will help Chinese exporters and hopefully kick-start slowing economic growth. Historically, this has been the main motivation behind devaluations—a desire to get a cost edge over competitors. With much of China’s growth coming from exports, this makes a lot of sense, but it’s not the sort of thing a government can admit.

What are the likely consequences?

Both of these...